Saturday, March 7, 2015

Retirement Withdrawal Strategy

Retirement or semi-retirement reverses the process you followed for the first 50 or 60 years of your life.  Instead of spending and saving/investing money, you are spending and withdrawing money from savings.  It sounds easy, but I found it was not as straightforward as I thought.  How much money do I withdraw per month or per year, which investments or savings do I tap for the money, and what are the best mechanisms to get the money into your bank accounts?

There are many articles on the Internet giving advice on this subject.  My approach is a hybrid of a few of these.

  1. I have a budget for spending per month and per year.
  2. The goal is to keep about 9 to 12 months of this budget in a high interest bank savings account that can be easily transferred to my checking account in under 3 days.  I use Ally for my savings account as their rates are pretty good.  The reason to keep a buffer is so that you are not forced to sell investments on short notice, perhaps during a momentary market dip.
  3. In order to keep the savings account topped up to 9 or 12 months of spending, I watch the asset allocation of my investments.  When I need to top up the savings account, I look at where my allocation is over-weighted.  Today, that would be in domestic equities.  I also look at the market dynamics, if everyone is enthusiastic, I sell, if the market is down, I may wait.
  4. I look at capital gains exposure for the over weighted asset and find the investment that will generate the least capital gains and therefore the least tax.  Often, there is only one investment fund for that asset class so the answer is obvious.
  5. Then I sell an appropriate amount of the over-weighted investment, and transfer that amount to the high interest savings account at Ally.  Don't sell small lots of securities often, as you will incur unnecessary high brokerage fees.
  6. As needed, I transfer money from the savings account to the checking account in order to pay bills, usually once or twice a month.  These savings accounts usually have limits on the number of withdrawals per month (6 in the case of Ally), so you don't want to do this too often.
This seems to work for me but you can make your own decision on what works best for you.  Consulting your financial advisor is appropriate.

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